1 Beijing calls for more ‘economic propaganda’ & ‘public opinion guidance’ amid roll-out of weak economic data
At the time this newsletter was published, the PRC authorities had yet to indicate whether or not there would be a Third Plenum of the 20th Central Committee or hint as to what might be discussed at the political conclave. The CCP leadership, however, held a Politburo meeting on economic work in 2024 and convened the annual Central Economic Work Conference.
Meanwhile, the PRC’s latest official economic data shows that the Chinese economy continues to deteriorate and is not “recovering for the better” as depicted in CCP propaganda.
High-level economic work discussions
Dec. 8
PRC state media reported that the CCP Politburo held a meeting to study and analyze economic work in 2024. The Politburo also studied plans for anti-corruption work and reviewed regulations on party disciplinary action.
The meeting, which was chaired by Xi Jinping, noted that 2023 was a year of economic recovery following three years of “zero-COVID” measures. The meeting added that the Chinese economy had withstood external pressures, overcame internal difficulties, and “has rebounded and is on the rise” under the leadership of Party Central with Xi Jinping at the core.
The meeting stressed that economic work in 2024 must be guided by “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era” and adhere to the principle of seeking progress while maintaining stability and promoting stability through progress.
Some of the 2024 work arrangements discussed at the meeting include having the PRC authorities take the following actions:
- Strengthen counter-cyclical and cross-cyclical adjustments of macro policies.
- Implement proactive fiscal policies and prudent monetary policies.
- Strengthen economic propaganda and public opinion guidance.
- Lead the construction of a modern industrial system with scientific and technological innovation.
- Work to expand domestic demand and create a virtuous cycle of mutually reinforcing consumption and investment.
- Work to deepen reforms in key areas.
- Work to expand high-level opening up, and consolidate foreign trade and foreign investment fundamentals.
- Work to continue effectively preventing and resolving risks in key areas, and resolutely safeguard the bottom line of not incurring systemic risks.
- Adhere to doing a good job in the work of the “three rural issues” (agriculture, rural areas, and farmers).
- Further promote the construction of ecological civilization and green low-carbon development.
- Adhere to effectively safeguarding and improving the people’s livelihoods to the best of their capabilities.
Dec. 11
Reuters reported that the annual Central Economic Work Conference, where Xi and other top leaders would discuss economic targets and map out stimulus plans for 2024, was ongoing and likely to end on Dec. 12.
Reuters said that it was told by PRC government advisers that they would recommend economic growth targets ranging from 4.5 percent to 5.5 percent for 2024, with most of them preferring a target of around 5 percent.
Reuters also reported that Citi analysts expect China to set a fiscal deficit target of 3.8 percent of gross domestic product, or 3 percent of the GDP on top of 1 trillion yuan in special treasury bonds, as well as a special local government bond quota of 3.8 trillion yuan.
Analysts at Citi expect China to set a fiscal deficit target of 3.8% of gross domestic product, or 3% of GDP on top of 1 trillion yuan ($139.32 billion) in special treasury bonds, and a special local government bond quota of 3.8 trillion yuan.
Dec. 11 to Dec. 12
The Central Economic Work Conference was held in Beijing. The meeting was attended by members of the Politburo and its Standing Committee, other relevant senior leaders of the Party, the government and the military, the main persons in charge in provincial Party Committees and governments, as well as the main persons in charge of the relevant central and local ministries and commissions.
At the meeting, Xi Jinping delivered a speech to the top CCP leaders in attendance where he summarized his leadership’s economic work in 2023, analyzed China’s current economic situation, and made economic work deployments for 2024. PRC premier Li Qiang delivered concluding remarks at the end of the conference.
From state media reporting, noteworthy points from the meeting include:
- The meeting said that promotion of Chinese-style modernization must be regarded as the greatest political priority.
- Regarding economic work in 2024, the meeting called for seeking progress while maintaining stability, promoting stability through progress, engaging in construction before destruction (先立後破).
- The meeting called for adopting a proactive fiscal policy and reasonably expanding the scope of issuing local government bonds for capital funding.
- The meeting called for strictly supervising the transfer of payment funds and maintaining strict financial discipline.
- The meeting called for strictly controlling general expenditures, and noted that Party and government agencies must get used to “belt-tightening” (過緊日子).
- The meeting called for adopting prudent monetary policy and maintaining reasonable and sufficient liquidity.
- The meeting called for incorporating non-economic policies in assessing the consistency of the macroeconomic policy orientation.
- The meeting called for strengthening economic propaganda and public opinion guidance, and promoting the theory that “China’s economy is bright” (中國經濟光明論).
Key points for economic work in 2024 include:
- Lead the construction of a modern industrial system with scientific and technological innovation.
- Focus on expanding domestic demand.
- Deepen reforms in key areas.
- Plan a new round of fiscal and taxation system reform, and implement financial system reform.
- Expand high-level opening up.
- Continue to effectively prevent and defuse risks in key areas.
- Coordinate the resolution of risks concerning the real estate sector, local government debts, and small and medium-sized financial institutions; crack down on illegal financial activities; and resolutely maintain the bottom line of preventing systemic risks.
- Continue to do a good job in the work of the “three rural issues.”
- Promote urban-rural integration and coordinated regional development.
- Promote the construction of ecological civilization and green low-carbon development.
- Effectively protect and improve people’s livelihoods.
Economic propaganda
Dec. 12
State mouthpiece Xinhua published an article touting the PRC authorities’ economic results titled, “Reading China’s Numbers Over the Decade | Ten Sets of Data to Witness the Great Achievements of the New Era” (數讀中國這十年｜十組數據見證新時代大成就).
The article claimed that the Chinese economy over the past ten years has been “highly resilient, has great potential, and has broad room for maneuver,” and that its “long-term good fundamentals have not changed and will not change.”
The article then listed 10 pieces of data to highlight the authorities’ supposed “great achievements”:
- China’s GDP increased from 59.3 trillion yuan to 121 trillion yuan from 2013 to 2022.
- The per capita disposable income of Chinese residents increased from 16,500 yuan to 36,883 yuan over the past 10 years. China also has the world’s largest and most growing middle-income group with more than 400 million people. China’s middle-income group is expected to exceed 800 million in the next 15 years, and this would further promote the continuous development of China’s “ultra-massive markets” (超大規模市場).
- China’s total retail sales of consumer goods increased from 23.8 trillion yuan to 44 trillion yuan from 2013 to 2022. This firmly establishes China as the world’s second-largest consumer market, the largest online retail market, and the world’s second-largest import market.
- Since 2012, the number of new urban jobs nationwide has continuously remained above 11 million. By the end of 2022, the cumulative number of new urban jobs will exceed 140 million. From January to October 2023, there were 11.09 million new jobs created in cities and towns nationwide.
- China’s foreign trade continuously achieved new breakthroughs in the past 10 years, with the total value of imports and exports in 2022 exceeding 42 trillion yuan. In the first 10 months of 2023, the total value of China’s imports and exports exceeded 34 trillion yuan.
- The national fiscal revenue increased from about 12.9 trillion yuan in 2013 to about 20.4 trillion yuan in 2022. In the first 10 months of 2023, the national fiscal revenue increased 8.1 percent to 18.7494 trillion yuan .
- China saw another bumper grain harvest in 2023 with a total output of 1.39082 trillion catties (about 6.95 million tons), an increase of 17.76 billion catties from the previous year and a stable harvest of over 1.3 trillion catties for nine consecutive years.
- Society-wide R&D expenditure increased from 1 trillion yuan in 2012 to 3.09 trillion yuan in 2022.
- Over the past decade, China supported an average economic growth rate of 6.6 percent with an average annual energy consumption growth rate of 3 percent, making the country one of the fastest in the world in terms of reducing the intensity of energy consumption.
- China’s national comprehensive transportation network has over 6 million kilometers of total mileage. As of the end of 2022, China has built a transportation infrastructure network with “the world’s largest high-speed railway network and highway network, as well as a world-class port group.”
Latest economic data
Dec. 7
The PRC General Administration of Customs released the following trade data (in U.S. dollars) for November 2023 and the first 11 months of the year.
November
- China’s total trade (imports and exports) was $515.47 billion, or no change from a year ago. (Total trade declined 1.3 percent year-on-year when compared with the PRC’s own data for November 2022.)
- Exports increased 0.5 percent year-on-year to $291.93 billion. (Exports decreased 1.4 percent when compared with the PRC’s own data for November 2022.)
- Imports decreased 0.6 percent year-on-year to $223.54 billion. (Imports decreased 1.2 percent when compared with the PRC’s own data for November 2022.)
- The trade surplus increased 4 percent year-on-year to 68.39 billion. (The trade surplus fell 2.1 percent when compared with the PRC’s own data for November 2022.)
January to November
- China’s total trade was down 5.6 percent year-on-year to $5.41 trillion. (Total trade decreased 6.5 percent from a year ago when compared with the PRC’s own data for the January-November 2023 period.)
- Exports fell 5.2 percent year-on-year to $3.08 trillion. (Exports were down 6.6 percent when compared with the PRC’s own data for the January-November 2023 period.)
- Imports declined 6 percent year-on-year to $2.33 trillion. (Imports declined 6.4 percent when compared with the PRC’s own data for the January-November 2023 period.)
- The trade surplus decreased 2.7 percent to $748.13 billion. (The trade surplus fell 6.7 percent when compared with the PRC’s own data for the January-November 2023 period.)
Foreign trade
China’s trade surplus with the following main trading regions for the first 11 months of 2023 was:
- Down 31.3 percent to the European Union (14.9 percent of China’s export trade volume).
- Down 17.6 percent to the United States (14.9 percent of China’s export trade volume).
- Down 15.2 percent to the ASEAN region (15.4 percent of China’s export trade volume).
- Down 82.1 percent to Latin America (7.3 percent of China’s export trade volume).
- Up 40.7 percent to Africa (5.1 percent of China’s export trade volume).
China’s trade deficit expanded particularly significantly for the first 11 months of the year with Germany and Canada:
- China’s trade surplus with Germany (3 percent of China’s export trade volume) was $5.08 billion in the first 11 months of 2022, but ran a trade deficit of $5.63 billion in the first 11 months of 2023, or a deficit expansion of 210.8 percent.
- China’s trade surplus with Canada (1.3 percent of China’s export trade volume) was $12.67 billion in the first 11 months of 2022 and just $270 million in the first 11 months of 2023, or a surplus drop of 97.9 percent.
Dec. 9
The National Bureau of Statistics announced that China’s consumer price index and producer price index in November 2023 fell year-on-year by 0.5 percent and 3 percent respectively, and fell month-on-month by 0.5 percent and 0.3 percent respectively.
China’s CPI fell the fastest in three years in November. Consumer prices in China were also negative for two consecutive quarters, a first since 2015.
Dec. 11
The China Association of Automobile Manufacturers released data showing that car production and sales in China reached 3.093 million units and 2.97 million units respectively in November 2023, or a year-on-year increase of 29.4 percent and 27.4 percent respectively.
Sales of domestic cars increased 5.2 percent from a month ago to reach 2.488 million units. Meanwhile, car exports decreased 1.1 percent month-on-month to 482,000 units.
What’s next
1. The Xi leadership’s lack of a schedule for convening the Third Plenum of the 20th Party Congress, as well as the continued issuing of vague policy directions at high-level meetings on economic work instead of signaling forceful stimulus or other concrete steps to revive the Chinese economy, suggest that Beijing is still at a loss on how to proceed with defusing the real estate and financial crises plaguing the regime and economic rescue.
The lack of clear messaging about whether Party Central will proceed with a Third Plenum and announce economic and political reforms (a common theme of several such plenary sessions) is an unsettling development for investors and companies who are rethinking their China plans. Continued delays in the convening of the Third Plenum could be interpreted by investors and foreigners as an indication that the Xi leadership is apathetic about the current state of the Chinese economy, will not issue effective stimulus, and has no interest in political reforms beyond strengthening the Party’s control over the regime. This could in turn trigger a further loss of confidence in China’s prospects for 2024 and beyond, hasten outflows from China, and accelerate economic deterioration.
The Xi leadership could be hesitant about holding the Third Plenum of the 20th Party Congress because its many policies this year to back the private economy, stabilize the real estate crisis, drive consumption, etc. have been mostly inadequate to the task. Meanwhile, the Chinese economy continued to weaken rather than recover for most of 2023. The Xi leadership could be concerned that it could end up damaging market confidence further if it introduces measures and reforms at the Third Plenum that are widely perceived to fall short of what is needed to turn around China’s bleak economic situation. However, the Xi leadership can only put off holding the Third Plenum for so long before investors and foreigners come to suspect that Beijing does not have what it takes or will not do what is required to rescue the economy, and become increasingly disillusioned about the much-propagandized “governing capabilities” of the PRC authorities.
It would be even more troubling for Xi Jinping and the CCP if the reason that the 20th Central Committee has not convened its third plenary session yet is simply because the Party elite cannot reach a consensus on how to proceed with economic and political reform. If so, then this bodes very ill for China’s economic prospects in 2024 and the overall stability of the CCP regime.
2. Beijing has decided to double down on propaganda work (“strengthening economic propaganda and public opinion guidance”) to maintain market confidence and public faith in the PRC government as the Chinese economy sharply declines. However, the economic propaganda issued by Xinhua and other official media fails to cover up the fact that the Chinese economy has performed worse in 2023 than during the “zero-COVID” years, and that rapid economic recovery has not been forthcoming.
Various signs, however, show that the Chinese economy is in overall decline and the CCP’s data and propaganda cannot completely obscure the bleak situation.
First, the falling of consumer prices in China for the second month straight hints at deepening deflation and suggests that the PRC authorities’ measures for economic revival have been insufficient thus far.
Second, the seemingly bright car sales figures were achieved only after auto manufacturers and local governments repeatedly slashed prices and provided various subsidies in fighting for a slice of the consumer’s future purchasing power. And despite the price wars, only 40 percent of car companies met more than 80 percent of their annual sales targets for the year, according to mainland media reports.
NBS data shows that the operating income of the auto industry, one of the pillars of the Chinese economy, increased 10.4 percent year-on-year in the first three quarters of 2023 to reach 7.1 trillion yuan. However, the auto industry’s profits over the same period increased by just 0.1 percent from a year ago. The auto industry’s profit margin was 4.9 percent, a low figure when compared to the average manufacturing industry profit margin of 5.6 percent. Also, the auto industry’s price war may have temporarily increased output and sales, but will also intensify vicious cycles that worsen deflation in China.
Third, high real interest rates and corporate borrowing costs are affecting economic growth. The falling of consumer and producer prices at a much faster pace than China’s average loan rate has seen real interest rates exceed 4 percent and may even be near 5 percent (the highest since 2016), according to Bloomberg calculations. High real interest rates will increase corporate financing costs and disincentivize investments, worsening China’s “balance-sheet recession.”
Fourth, while local governments appear to be making up for reduced total social financing stemming from the “balance-sheet recession” by issuing more bonds, the bulk of the funds raised from bond sales are being used to pay off old debts. Those “idle” funds (in this case, funds bouncing back and forth between the financial sector and local governments without actually driving economic growth) drain liquidity from the markets and leave financial institutions less able to support the “real” economy. For example, the January-November period in 2023 saw the issuance of 5.24 trillion yuan worth of municipal bonds (expected annual issuance of 5.7 trillion yuan), 9.14 trillion yuan of local bonds (expected annual issuance of 10 trillion, or much more than the 7.37 trillion yuan for the whole of 2022), and 9.96 trillion of treasury bonds (expected annual issuance of over 11 trillion). This means that more than 2 trillion yuan in liquidity was siphoned away from the markets each month on average this year by government departments.
Finally, Moody’s downgrading China’s credit rating outlook from stable to negative is a sign that foreigners are souring on the country’s prospects due to the poor state of the economy and the real estate crisis. As foreign financial institutions flip their outlook on China, international investors will increasingly curb their China investments and financing, which would in turn exacerbate the financing problems and risks of Chinese companies.
2 US vows tight control of exports of advanced tech to China
Commerce Secretary talks export controls
Dec. 2
U.S. Commerce Secretary Gina Raimondo said at the Reagan National Defense Forum in Simi Valley, California, “We cannot let China get these chips. Period. We’re going to deny them our most cutting-edge technology.”
Raimondo said, “I know there are CEOs of chip companies in this audience who were a little cranky with me when I did that because you’re losing revenue. Such is life. Protecting our national security matters more than short-term revenue.”
She further called out Nvidia, “If you redesign a chip around a particular cut line that enables them to do AI, I’m going to control it the very next day.”
Raimondo also noted that while communication with China can help stabilize bilateral times, “on matters of national security, we’ve got to be eyes wide open about the threat.” She added, “This is the biggest threat we’ve ever had and we need to meet the moment.”
Dec. 5
Secretary Raimondo told CNBC in an exclusive interview that more controls on technology exports to China could be coming as needed.
“We have to change constantly,” she said. “I know that’s hard for industry. They want a clear line in the sand. The truth of it is though, technology changes, China changes and we have to keep up with it.” Raimondo also said that “the threat from China is large and growing.”
Raimondo said Nvidia does not want to “violate our export controls” and the U.S. wants the company to sell chips to China. “They just can’t sell the most sophisticated AI chips to China,” she said.
Raimondo said that she is considering similar controls on “most sophisticated AI and all the products that flow from that,” as well as biotechnology and quantum computing.
Dec. 11
When asked by Bloomberg News as to how the Commerce Department will respond to Huawei’s chipmaking breakthrough (Huawei’s Mate Pro 60 phone released in August 2023 with a relatively advanced processor), Secretary Raimondo said that the U.S. will take the “strongest possible action” to protect its national security.
“Every time we see something that’s concerning, we investigate it vigorously,” Raimondo said, adding that the development is “deeply concerning.”
Dec. 12
Speaking to Reuters, Secretary Raimondo said Nvidia “can, will and should sell AI chips to China because most AI chips will be for commercial applications.” However, “what we cannot allow them to ship is the most sophisticated, highest-processing power AI chips, which would enable China to train their frontier models,” she said.
Raimondo added that she was disappointed that Chinese airlines have not started taking airplane deliveries from Boeing, an issue that President Joe Biden raised with Xi Jinping at their summit in California. “We’re going to keep pressing. There is no reason they shouldn’t make good on that commitment,” she said.
No breakthrough in military communications?
Dec. 8
White House spokesman John Kirby told reporters aboard Air Force One that the U.S. and China have not resumed the military-to-military talks that Xi and Biden agreed to at their summit.
Kirby said, “It’s my understanding that they haven’t been restored and part of that could be because they don’t have a minister of defense. We certainly urge them to designate somebody soon and we’re eager to get those [communications] going.”
Dec. 11
NBC reported that U.S. defense officials repeatedly attempted to reach their PRC counterparts after Biden and Xi agreed to resume direct military communications, but did not receive any responses, citing three senior U.S. officials.
Two senior U.S. defense officials said that they are hopeful that maritime safety talks will be held at some point in 2024, but that nothing has been scheduled yet.
A senior U.S. official told NBC that the PRC has been “slow to move” and that the U.S. military at various levels has been unsuccessful in reaching PRC commanders. “It’s not for lack of trying,” the official said.
Dec. 12
Pentagon spokesperson Major General Patrick Ryder told a press conference, “We have been working closely with our defense attache office and our policy team has been in active coordination with Beijing in order to arrange communication. But again nothing to announce at this time.”
White House National Security Advisor Jake Sullivan told a Wall Street Journal event that progress on military-to-military communications are still on track. “I actually don’t think of it as a delay. I think this is just the normal implementation of a summit outcome and it’s continuing as both sides expected it would so I see no issue there,” he said.
Sullivan added, “We believe that the real question is not: ‘Will it get started?’ We’re confident in that. The real question is: ‘Can it be sustained through any ups and downs that may come in the future?’”
Our take
Secretary Gina Raimondo’s recent remarks about advanced chips and China indicates that the Biden administration is unlikely to defer to the PRC over the latter’s complaints about U.S. export controls. If anything, the Biden administration will likely tighten restrictions and close loopholes to deny the PRC access to the latest semiconductors and other advanced technologies like artificial intelligence as it looks to safeguard U.S. national security.
Meanwhile, the lack of progress on military-to-military communications between the U.S. and the PRC after the Biden-Xi summit could be either part of the “normal implementation of a summit outcome” as Jake Sullivan indicated, or could reflect stalling on Beijing’s end. The Xi leadership could be stalling on resuming military-to-military communications because it was not sincere about the matter to begin with, or because Xi Jinping is genuinely having trouble replacing former defense minister Li Shangfu due to various problems in the leadership of the People’s Liberation Army, or a mixture of both explanations. Regardless, we previously warned in assessing the outcome of the Biden-Xi meeting that “who actually came out ahead … will only become clearer in assessing how the Xi leadership goes about delivering on its concessions.”
What’s next
We earlier noted that we do not expect the Biden-Xi summit in California to “dramatically change the current deterioration of Sino-U.S. relations as both sides prioritize the safeguarding of their respective national security and remain unwavering in their respective ideological stances.” The developments post-summit are continuing to affirm our assessment.
Businesses, investors, and governments must account for the current geopolitical situation in making their China plans to better sidestep political, economic, and geopolitical risks.
